COST AND VALUATION ENGINEERING.

A LECTURE PAPER PREPARED BY ENGR. N.P. UGOCHUKWU NZURUMIKE.

FNSE, FNIMechE
FOR THE COMPLSORY REFRESHER COURSE FOR PROSPECTIVE CORPORATE
MEMBERS OF THE NIGERIAN SOCIETY OF ENGINEERS.

1.0 INTRODUCTION.
Cost and Valuation Engineering, to many of us here seated is a new field of Engineering Study.
Truly you are not or cannot be said to be wrong going by the well known fields of Engineering
studied in most Universities the World over. Surprisingly this is a field in which the Engineer has
been pushed to play a second fiddle by other professions in the past. Today the Engineer is up
and claim that which is rightfully our and in our domain.

2.0 DEFINITIONS.
2.1.

VALUATION ENGINEERING: This is the art of estimating the fair monetary measure of
the desirability of ownership of specific properties for specific purposes.

2.2

COST ENGINEERING: This is that area of Engineering practice where engineering

judgment and experience are utilized in the application of scientific principles and techniques
to problems of Business and Management Projects.

3.0

PRINCIPLES OF VALUATION ENGINEERING.

3.1

THE NATURE OF VALUATION

Engineers practice valuation through the organized field of Engineering Valuation.
To gain an insight to the nature of engineering valuation, examination of the types of valuation
will repay study.
Valuation is the art of estimating the fair monetary measure of the desirability of ownership of
specific properties for specific purposes.
Broadly, valuation is of three types; Ordinary Valuation, Formal Valuation, and Engineering
Valuation.

3.2

TYPES OF VALUATION
Almost everybody gets directly involved in Ordinary Valuation practice whereby in ordinary
exchange of property, the value is determined by the judgment of the seller and the buyer.

3.2.1

FORMAL VALUATION
As the property to be exchanged gets more complicated, the practice becomes Formal
Valuation hereby the value is determined by judgment of specially qualified valuators. Real
property is usually the realm where formal valuation is applied, and values are mostly fixed
by expert judgment. In some cases mathematical computations of varying degrees are required in
frequently straight forward and non- technical manner.
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3.2.2

ENGINEERING VALUATION.

Engineering valuation is the art of estimating the value of specific properties where
Professional Engineering knowledge and judgment are essential. The properties covered
under this of valuation are mines, factories, buildings, machinery, industrial plants,
Engineering constructions of all kinds, and public utilities. The purposes of engineering
valuation are related IO the legal aspects of transfer of properties, to utility rate making,
taxation, condemnations, mergers, restructuring, financing etc.
Marston et al (1936) explain that the term estimate is used in Engineering Valuation in the
sense in which it is employed in general engineering practice. They aver that it indicates a
carefully considered computation of some quantity, the exact magnitude of which cannot be
determined. In conclusion, they state that the estimate represents the true magnitude as closely
as it can be determined by the exercise of sound judgment based on appropriate computations;
and warn that it should not be confused with off- hand approximations that are little better than
outright guesses.

3.3

THE SPECIALISED NATURE OF VALUATION ENGINEERING.

The entire process of engineering valuation from preliminary examination of enterprise to
functional classification of assets, and from costing basis to depreciation application are all
engineering activities.
For example the taking of inventory at the preparatory stage would necessitate frequent
reference to construction plans and specifications. The determination of the costing basis is an
engineering question, while the estimation on replacement basis requires determination of
alternative process engineering schemes. Depreciation or the estimation of the consumed
usefulness of the property for plant, machinery, vessels and vehicles, requires professional
engineering judgment. From this sketch one sees the accent on engineering
multlidisciplinarity in engineering valuation, the proper approach in procuring such
professional service being the retaining of a professional engineering firm with engineers of
various disciplines rather than a firm of other professionals that have dragged in one engineer
to its service.

3.4

VALUATION CLASSIFICATIONS AND CAREERS

The art of engineering valuation mentioned above has developed since about 1890 when Engineers,
industrialists, economists and the courts began to be drawn into active participation in Formal Valuation
work in the US. At that time as extensive industrial expansion took place, Formal Valuation activity
shifted from the province of the merchant, the accountant and the financier to the Engineer. Since then the
art of Engineering Valuation has been continually undergoing improvement, that between it and Formal
Valuation, at least six known classifications of valuation practice have evolved. These are: (i)
Appraisal Review and Management; (ii) Business Valuation; (iii) Machinery & Equipment Valuation,
(iv) Personal Property Valuation; (v) Real Property Valuation; (vi) Technical Valuation. Many more are
on the way

3.5

VALUATION CLASSIFICATIONS/DISCIPLINES
The classifications mentioned above follow generally the categories of properties broadly
respecting special conditions calling for multi-specialization collaboration among experts
from diverse professional backgrounds.

3.6

APPRAISAL REVIEW & MANAGEMENT

Valuation is practiced under this classification by valuers / appraisers whose functions relate
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to the administration of appraisal/valuation activities within the private or public sector.

3.7

BUSINESS VALUATION
This classification is for the determination of the market value of the going business including
all its tangible and intangible assets. The business enterprise valuations can be made either to
express the value of the total business, or the capital stock of the business, or the controlling
interest, or the minority interest.
Disciplines required for business valuation include administrators, accountants, investment
analysts, Engineers, real estate surveyors, stockbrokers etc.

3.8

PERSONAL PROPERTY VALUATION

Valuers functioning under this classification practice under the following sub-classification or
disciplines: (i) Residential Contents (general), (ii) Fine arts, (iii) Antiques and Decorative arts,

(iv) Gems and Jewellery, (v) classified specialties.

3.9

3.10

MACHINERY & EQUIPMENT VALUATION

Under this classification the relevant appraisers carry out valuation of manufacturing/process
industries.
The Engineer is the prime professional in this specialty.
REAL PROPERTY VALUATION
The real property valuer is expected to have skill in one or more specializations of this
classification: (i) Urban buildings, (ii) Residential properties, (iii) Rural properties (including
farms and agri-business), (iv) Timber and Timberland.
The Estate Surveyor is the prime professional for real property valuation.

3.11

TECHNICAL VALUATION
This embraces all activities required in estimating the value of certain special types of real and
personal properties. Specializations within this classification include Aircraft, Computers &
High Tech Personal property, Marine Survey, Mines and Quarries, oil & Gas, public utilities.
Under this classification with its diverse disciplines, the engineer is prime professional.
In the US, the interests and advancement of Business, Personal Property.
Equipment, and Technical Valuations are promoted by the American Society of Appraisers
headquartered in Washington DC.

4.0

PRINCIPLES OF COST ENGINEERING.

A Cost Engineer is by education, training and professional experience, competent to develop

and make practical use of the principles of engineering cost management which embraces
activities such as cost estimating, cost control, value engineering, Planning, Scheduling,
Construction management, investment appraisal, risk analysis, conceptual studies, profitability
analysis of engineering projects and processes. The cost engineer is a qualified professional
dedicated to total cost management over the life cycle of a project, facility or manufacturing
Operation.
The purpose of cost engineering is to determine standard cost for execution of works,
quotations, cost control, cost assessment and cost management. Cost must be calculated based
on the engineering facts by account. Allocation and distribution in most cases are not valid.

Sound mathematics and correct procedures are necessary for developing cost estimating
systems, however it is more important for cost managers and users of cost information to
understand how costs are developed
4.1

4.2

THE INTERNATIONAL COST ENGINEERING COUNCIL (LCEC).

The International Cost Engineering Council (ICEC) founded in 1976 is the world- wide
council/forum for cost engineering. It is a non profit organization with the objective to
promote cooperation between national and multi-national cost engineering organizations
worldwide for their mutual well being and that of fellow members. The ICEC has over 40
multinational member countries including the
Association for the Advancement of Cost Engineering (AACE International) of the United
States of America founded in 1956 and the Association of Cost Engineers, United Kingdom
founded in 1961 to mention but a few.
OBJECTIVES OF ICEC
*
*

To encourage, promote and advance the Science and art of cost engineering and project
management for the public good, worldwide.
To coordinate and sponsor International Cost Engineering and Project Management
Congress (on a worldwide scale).

The objectives of the Institute of Appraisers and Cost Engineers a division of the Nigerian
Society of Engineering but is not includes but is not limited to the promotion of art, science
and practice of Engineering and cost engineering and maintenance of high ethical standards.
To co-operate with other International bodies having objectives cognate with those of IA&CE
and to liaise with similar bodies for the purpose of the reciprocal exchange of information and
mutual benefits. The IA&CE is dedicated to the 21st century total Cost Engineering
Management.
The Institute of Appraisers and Cost Engineer (IA&CE) a division of the Nigerian Society of
Engineers is in the process of joining the International Cost Engineering Council (ICEC) and
the American Society of Appraisers (ASA) for International mutual benefits.
4.3

4.3.1

THE DIVERSE WORKS OF COST ENGINEERS INC1UDES:

Cost Estimating
Cost Control
Cost Planning
Scheduling
Risk
CRITERIA
In modern times engineering and construction works are carried out with latest (21st Century
technological concepts), therefore these services are becoming more sophisticated; the standards
required are very high and demanding. Total Cost Engineering Management (TCEM) becomes
more critical for full realization of projects from initial conception to final completion.
Stakeholders want their project to be cost effective. Every client and every project will have
different criteria for cost-effectiveness. These criteria engender a relationship between the
underlisted factors:
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*
*
*
*
*
*

Design
Material
Quality
Expenditure
Time
Special requirements of the project.

The design team must be constantly aware of the requirements of the client and the options
which are available in creating the desired balance within these relationships.
Cost Engineering Concepts and methodology requires the highest integrity, broad based
professional skill, sound oral/written communication, comportment and high professional
ethics to exercise professional judgment in a fair and firm manner to all concerned at all times,
hence attention to details must be paid to the followings:
4.3.2 Cost Control
In recent times, rising prices, interest rates, high labour and energy cost and advanced
technological concepts of engineering and construction projects have caused stakeholders to
demand that their professional advisors should accept cost as an element in design.
The successful cost control of engineering and construction project demands attention to details
by Cost Engineers for full realization of the needs of the client within his financial limits.
The initial conception/design stages are therefore, critical in establishing relationships between
cost and quality, as by the time the sketch design is developed, much of the cost is already
committed.
By virtue of the nature of stakeholders in projects, it would not be ingenious to have many
people working long and hard for many weeks or months to achieve a
Cost-effective design which has the support of users, only to find that it is not affordable or that
it is in excess of the approved budget.
To avoid costly and frustrating re-designs, a cost plan must be established at earliest
possible time, which matches the approved budget. The subsequent planning and design
process is to be managed within this budget.
4.3.3 Cost Plan
A cost plan (detail cost of each engineering system) provides the means of controlling the
design so that the complete scheme may be built within the approved budget.
Monitoring of the cost plan enables the Cost Engineers to detect at any time during the project
if the budget is exceeded or to take immediate remedial action before planning and design
process proceeds further.
At each phase of the project, the cost plan is updated and the design managed so that the budget
is not exceeded. Cost plan also provides basis for comparison of alternative designs / options.
A properly prepared/monitored cost plan gives the project Stakeholders confidence that it is
"on the right track" in respect of costs.
4.3.4 Scheduling
Scheduling is an essential part of successful part cost engineering management from start to
completion of projects. Attention to details is important in scheduling to ensure that as far as
it is reasonably practicable, careful consideration is given to constraints as site, climate and
manpower.
A properly prepared schedule must reflect the project parameters.
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4.3.5 Risk or Contingency

The whole risk management concepts have numerous uses during design, construction,
commissioning and maintenance. One critical factor that requires, resolution prior to
performing any risk management activity must surely be a sound definition of what risk and
contingency represent. Risk and contingency allowance must be considered as two very
separate entities as the factors that constitute risk and contingency in probabilistic estimate are
different.

RISK

Risk is the level of uncertainty in a task or a

project.
Risks are largely foreseeable. Cost

Engineers assure against them e.g.

meeting tight / declared operational
dates escalation

Allowance for identified risk other than a

simple incompleteness of design (e.g. an
alternative process apparently competitive
but without the knowledge that the client
will allow a change in specification)
Unforeseen and undeterminable costs.
Unknown factors which are likely to alter
the cost but which are not allowed for or
expected at the outset of the project.

4.4

CONTINGENCY
Contingency items are things
which might not happen. Cost
Engineers insure against them
e.g. Design errors/omissions,
estimating uncertainties, bad
ground conditions etc.
Sums of money allowed for
known and anticipated
expenditure, yet which is
indefinite in size, timing and
Specification.
Client additions/enhancements
to a Project.

An allowance for items which

are known to be required, by
contract team, for project, but
costs details are not clear at the
outset.

LIFE CYCLE COSTING

The 21st century engineering design concept is now based on the economic life cycle
cost, preference to the cheapest to the [possible constructional design, hence Cost
Engineers must give careful consideration to the underlisted three "Rs":
*

Running cost

Repairs cost

Replacement cost

These should be considered alongside the cost of initial construction work.

Annual cost associated with utilities, operations and owners budget. It should also be
remembered that the savings which arise are not just from the running cost but also from the
maintenance, and renewal costs.
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In terms of life cycle costing, for a building to function effectively and efficiently over time
careful consideration must be given at the design stage for the need to maintain and replace
installations.
4.5

THE LIMITATION OF COST ENGINEERING:

4.5.1 SERVICES BY NON ENGINEERS.

Engineering Cost Control is becoming more difficult, occasioned by the pace of changes in
advanced Engineering design and construction (21st Century technology) together with
changes in procurement methods and specialist contractor works.
The difficulties faced by non engineers attempting to forecast and control engineering costs
are as follows:

4.6

Not many of them have broad based advanced engineering experience of the
design, construction and procurement methods.

Difficulty in prediction of preliminary costs during the early stage of the

project.

Difficulty in controlling engineering cost during the design phase in which options
must be fully analyzed in line with their design concept, as changes will upset the cost
plan.

Most of them tend to use parametric techniques (e.g. N/M2) and estimates of
engineering costs based on these techniques can produce seriously flawed cost plan if
full engineering design have not been carried out.

Specialist engineering designs are difficult to estimate as cost is related to design

standard, complexity of the systems, and special requirements as needed by approving
authority

In point of fact, their lack of in-depth knowledge of complex engineering design is a

major problem.

COST ENGINEERING PRACTICE IN NIGERIA

Cost Engineering practice in Nigeria is semi - hijacked by non engineers hence the controversy
over which field of the professions should attend to works pertaining to costing / cost
management of engineering and processes.
I can say with all sense of responsibility that the hijacking of cost engineering practice by non
engineers was occasioned by exigency, but it must be emphasized that it is time we stopped
using the element of exigency to continue with flawed professional process .
The depth of the Engineers professional training and knowledge as afore-discussed and the
awareness/understanding of complex and latest 21st Century engineering Design and systems
puts the engineer in the right perspective for full realization of Cost Engineering Practice

The misrepresentation of facts by non engineers can not hold water for long and that is the
truth because there is a difference between getting it done and getting it right.
Undoubtedly therefore, the engineers broad based background and professional competence,
empowers him or her to practice Cost Engineering works satisfactorily with the attendant
benefit to the Nigerian economy.
5.0

RECOMMENDATION TO IMPROVE PROJECT COST ENGINEERING PRACTICE

IN NIGERIA.
Utilize competent, Professional Industrial Engineers and cost Engineers to determine what cost
should be rather than using others and obsolete methods.
Be certain that projects cost estimates are adequate and flexible to cope with potential changes
in the market, the completion and technology

Cost Engineers will prove very useful for activities of department of Budget, Monitoring and
Price Intelligence in the Presidency for the implementation of the Federal Government Due
Process Procedure for engineering Projects.

Cost should be calculated based on facts and transactions rather than by allocations and
distributions.

Cost Engineers training and professional experience will prove very useful for Federal
government - customs Destination Inspection and the on going Privatization exercise in the
country with the attendant benefits to the Nigerian economy.

Cost Engineers will also prove very useful for the Insurance Industry as the Engineering

Assessors / Loss Adjusters.

Monitoring of Cost engineering curriculum in tertiary institutions in line with 21st Century
technology.

NSE / COREN should press for the inclusion Cost Engineers fee in the Federal Government
approved Scale of fees.

6.0

PROFFESSIONAL CERTIFICATIONS.

6.1

International Valuation Standards Committee (IVSC) a nongovernmental member of United

Nations working with the World Bank.
International Cost Engineering Council (ICEC), membership is through affiliate institutions.
The Institute of Appraiser and Cost Engineers of Nigeria, a Division of The Nigeria Society of
Engineers.

6.2
6.3

7.0

Conclusion
I wish to conclude this paper by imploring members of the Institute of Appraisers And Cost
Engineers (IA&CE) a division of the Nigerian Society of Engineers to promote and take charge
of the art, Science, Management and practice of Cost Engineering with full sense of
professionalism.

REFRENCIES
1.
2.
3.
4.

Otis Anyaeji Asset Appraisal & Cost Engineering within the context of The Nigeria Society
of Engineers. October 2004.
Otis Anyaeji The Role of the Engineer in Valuation of Assets May 2001.
Dr Charles Mbelede Cost Engineering Practice: Nigeria as a Case Study 2003
Constitution Institute of Appraisers and Cost Engineers 2003

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