Cost Engineering

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

Control
Lecture 1
Part (a)
________________________________________________
Dr. Farrukh Arif,

Assistant Professor, NED UET
Lecture 1-1
Dr. Farrukh Arif, Assistant Professor, NED UET
Overview
Construction What it is, what it is not
The Design Process
Economic Evaluations
Users
Results
Reasons
Business Strategies
Information
International Business
Lecture 1-2
Construction
What it is, what it is not
Portable
plant, materials
Output=immobile structures
Construction plants vary in size and
complexity
Difference between construction,
manufacturing, and agriculture plants?
Lecture 1-3
Construction
Lecture 1-4
Construction
Construction
projects are broken down

into four groups
Industrial
Heavy engineering and infrastructure
Commercial building
Residential
Lecture 1-5
Design
Every
Design Is a New Combination of

Pre-Existing Knowledge that Satisfies
an Economic Want
New Combination Creativity
Economic Want Driver
Lecture 1-6
Elements of Design
Identification
and Definition of Problem

Development of Concepts
Engineering Models
Evaluation
Design
Implementation
Lecture 1-7
Design
Process
Lecture 1-8
Problem
Recognize
a Need
Economic Want
Good
Description = Good Solution

Detailed Specification of Requirements
Lecture 1-9
Concepts
New
Combinations of Existing
Knowledge
Need to Collect a Lot of Knowledge
Relative to the Problem
Unrestricted
Generation of Concepts
Then Select and Refine
Lecture 1-10
Engineering Models
Representation
to Explain an Aspect
Prediction
Discover
Pertinent Parameters
Flexibility
Simplistic
Lecture 1-11
Evaluation
Asking the right questions
What is the total cost from design up to
construction?
Does the construction coincide with the
abilities and experience of the contractor?
What is the owners profit from the total
investment during the first few years of
production and sales?
Pay-back period?
Lecture 1-12
Economic Evaluation
Market
Defines Economic Want

Cost Needs to Satisfy
Cost Model Should Parallel the Design
Detail and Accuracy of Estimate
Depends on Amount of Info Available
Depends on the Time for the Estimate
Lecture 1-13
Users
Economic Evaluation Produces:

Dollar Estimates
Labor Hour Estimates
Material Requirements
Used By:
Engineering
Manufacturing
Marketing
Materials Mgmt.
Accounting/Financial Planning
Lecture 1-14
Results from Economic Evaluation

Requires Answers to Questions

What are the performances, functions and
features of the product?
What Does It Look Like?
How Many?
Selects from Design Alternatives

Determines Manufacturing Methods
Decisions to Proceed
Lecture 1-15
Other Reasons
Cost to Manufacture
Profit Prediction
Labor Requirements
Time (Scheduling)
Control of Operations
Improvement
Budgets
Equipment Justification
Lecture 1-16
Strategies
Mass
Production
Large Quantities / Little Variation

Batch
Production
Smaller Quantities / Large Variation

Similar Processes
Projects
Very Small Quantities / Specialized

Lecture 1-17
Information
Available
Information Varies
By Point in the Development

Amount of Uniqueness of Product
Historical
Data (Accounting Records)

Measured Data
Policy Data
Lecture 1-18
Sources of Information
Accounting
Personnel Department
Operating Departments
Purchasing
Sales/Marketing
Supervisors/Managers
Trade Associations / Media
Lecture 1-19
CE-591-Cost Engineering and

Control
Lecture 1-Part (b)
Introduction to Cost Engineering
________________________________________________
Dr. Farrukh Arif,

Assistant Professor, NED UET
Lecture 1-20
What is Cost Engineering?

(AACE) defines cost engineering as

that area of engineering practice where
engineering judgement and experience are
utilized in the application of scientific
principles and techniques to the problems
of cost estimation, cost control, and
profitability.
Lecture 1-21
Total Cost Management

The effective application of professional and technical

expertise to plan and control resources, costs, profitability
and risk.
It is a systematic approach to managing cost throughout

the life cycle of any enterprise, program, facility, project,
product or service.
This is accomplished through the application of cost

engineering and cost management principles, proven
methodologies, and the latest technology in support of the
management process.
Lecture 1-22
What is a Project?
Projects can cover anything from a 2-day

engineering effort to resolve a minor
technical problem to the present-day super
projects
Multibillion Tunnel Project (Miami Tunnel)
We will relate most of the cost-engineering

principles to an average-size project
Petroleum or chemicals plant in the range of
$100 million to $200 million
Lecture 1-23
Project Life Cycle
Lecture 1-24
Why are Projects Built?

Favourable analysis of the marketing situation

Future increased demands
Need for new and different products
Research department may develop new
products with high sales potential
New government or social requirements
Ultimate reason in virtually every case in
economic need
Lecture 1-25
Why are Projects Built?

Questions needed to be answered

How much product should I make?
Where should the plant be built?
How competitive will a new product be?
If diversification is desirable, where and what?

Answer-Economic studies
Economic studies cannot be made without
investments, which, in turn, requires an estimate,
and that, in, turn requires a cost engineer (CE)
CE needed throughout life cycle
Need for cost control during all phases
Lecture 1-26
THE IMPORTANCE OF THE

COST ESTIMATE
Three important documents are critical to the

control of a project
The plan and schedule
The cost estimate
The contract between the owner and the contractor

Represent a major commitment by upper

management
Difficult to change once this commitment
Key tools for control over the much longer period
of project execution
Lecture 1-27
THE ROLE OF CEs DURING

THE EVALUATION PHASE

The earlier, the more effective

A period of screening, market evaluations, political and
geographic considerations, and major highlevel decisions
Role of CE
Provides the cost estimates needed in the economic evaluations
Different case studies reflecting alternate processes
Different geographic locations
Evaluation of a preliminary sketch of a new process being
developed
Lecture 1-28

THE BASIC-DESIGN PHASE
During the evaluation or screening phase, the main emphasis was

placed on the evaluation of the difference in the costs of alternative
approaches to select the most economical case.
During this phase:
The process or basic design is finalized
The physical layout of the facilities involved is given consideration.
The need for support facilities (utilities and off-plot items, such as storage, roads,
and fire protection) is reviewed.
Timing (schedule) is given more serious consideration.
The project execution strategy is also discussed (who does what, when, where).

Considered and discussed

CE will be making certain assumptions
Lecture 1-29
What is an Estimate?
An
estimate is a prediction
Design Basis: A step-by-step plan of
how the project people feel or predict
the job will be done
For Example;
Petroleum and chemical plant
Flow plan and equipment list
Conceptual-estimating phase
Lecture 1-30
IMPORTANCE OF DESIGN
BASIS
There
are many potential variations
Final site for the project may not yet be

selected
Project schedule
Availability and cost of labour
Source of materials
Final detailed design
Taxes etc.
Lecture 1-31
Role of CE During Basic-Design

The
design basis, are not yet finalized

The project people are engrossed in
developing the design and execution
basis
Little time to devote to developing for
CEs
Jack-of-All-Trades
Lecture 1-32
Jack-of-All-Trades
For example, to predict the final hardware that will result

from the basic design, CEs need to visualize what the final
detailed design will look like (i.e., they must be designers
of sorts). They need to develop a time schedule for the
project and, therefore, have to act as schedulers. They
need to gather and analyse historical cost data and act as
data analysts. They must establish costs for different
geographic locations and countries and predict escalation
rates, in effect becoming mini-world-economists. They
must predict contract strategy: what kind of contract, to
how many contractors, under what conditions, and,
therefore, act as contracts engineers.
Lecture 1-33

DETAILED ENGINEERING
After contract award, CEs embark on dual roles. We still need an owners CE on the
project (they are needed by the owner throughout the project to protect and monitor the
economic decisions that were made much earlier by the owner), but now contractors
require CEs to assist their project people to exercise cost control on the project.
During the detailed-engineering phase, contractors CEs will prepare the definitive
control estimate.
The estimates for change orders.
Cost-control engineer for the contractors project management team.
Owners CEs will have the responsibility or reviewing and commenting on contractors
detailed control estimates, reviewing their estimates for extra costs and change orders
and, most important on a reimbursable project, appraising and monitoring the
contractors efforts in the area of cost control.
Lecture 1-34
ROLE OF CEs DURING

CONSTRUCTION
We have both the owners and the contractors CEs

playing important roles.
The owners CEs continue to appraise the contractors
cost control efforts, monitor changes, and review extras.
The contractors CEs now become more deeply involved
in providing input to the contractors planning and
scheduling team.
Their forecasts of labour work hour requirements are an
essential ingredient for the project schedule and have an
impact on predicting both final costs and final completion
date.
Lecture 1-35
SOME BASIC COSTENGINEERING TERMS

Cost Engineer means one thing to an owner and

often something else to a contractor.
Owners definition of a CE is an engineer who can
and, most likely, will be involved in all aspects of
cost engineering.
Most contractors still use the term Cost Engineer
to describe only their cost-control engineer and
refer to the engineer developing the cost
estimates as an estimator.
Lecture 1-36
SOME BASIC COSTENGINEERING TERMS

Types

of Estimates
Some of the terms often used to describe these estimates are as follows:
Planning/evaluation stage
Screening
Preliminary
Quickie
Order-of-magnitude/guesstimates
Rough, gross, scope, etc.
Basic design stage
Preliminary
Budget
Semidetailed
Detailed engineering construction
Definitive
Appropriation
Lump sum
Detailed
Lecture 1-37
It should be noted that the above terms,

although commonly used, can often be
confusing and misleading. For example,
describing an estimate as a budget
estimate provides very little information
regarding the estimate quality, the amount
of detail or effort involved, or when, within
the development of the project, the estimate
was prepared.
Lecture 1-38
INCENTIVES TO CENTRALIZE
COST ENGINEERING

Centralizing Cost Engineering within a company has some very distinct advantages
It provides a focal point within the company for all cost related matters.
Over time, Cost Engineering expertise is developed, resulting in effective cost estimating and cost
control.
With the assignment of CEs to projects, full time follow-up of the Cost Engineering area results on all
projects.
Estimating methods development and maintenance will be ongoing.
Central data collection, analyses, and maintenance will occur.
Estimates and cost control results will be reliable and consistent.
Finally, the Cost Engineering function will be elevated to professional status within the company with
full recognition by management and others of its importance to the success of project management
Lecture 1-39
THE SUCCESS FORMULA

THE THREE Ds
Definition,
Documentation
Discipline
Lecture 1-40
Overview of Cost Budgeting &

Cost Control
CE-591 Construction Engineering and
Control
Lecture-1
Lecture 1-41
Cost Budgeting
Allocation of overall cost estimates
to individual work items in order to
establish a cost baseline for
measuring project performances.
Lecture 1-42
Inputs to Cost Budgeting

Cost
Estimates
Work Breakdown Structure
Project Schedule
Lecture 1-43
Tools and Techniques for Cost

Budgeting
Tools
and
Techniques
for
developing project Cost Estimates
are used to develop budgets for
work items as well.
Lecture 1-44
Outputs from Cost Budgeting

Cost
Baseline
A time-phased budget that will be used
to measure and monitor cost
performance on the project. It is
developed by summing
estimated
costs by period and is
usually
displayed in the form of an S-curve.
Lecture 1-45
Lecture 1-46
Cost Control
Project cost control begins with the preparation of

the cost estimate and the construction budget.
The information that is generated for estimating
purposes can be in terms of productivity rates, unit
costs, or both.
Small contractors frequently work in terms of unit
costs while large contractors base their estimating
on productivity rates
Lecture 1-47
Cost Control (contd)

Cost Control is concerned with
(a) Influencing the factors which create changes to
the cost baseline to ensure that changes are
beneficial.
(b) Determining that the cost baseline has
changed.
(c) Managing the actual changes when and as
they occur.
Lecture 1-48
Cost Control (contd)

Cost Control includes:
Monitoring cost performances to detect variances from

plan.
Ensuring that all appropriate changes are recorded

accurately in the cost baseline.
Preventing incorrect, inappropriate, or unauthorized

changes from being included in the cost baseline.
Informing appropriate stakeholders of authorized

changes.
Lecture 1-49
Inputs to Cost Control

Cost Baseline
Performance Reports
Provide information about cost performance
such as which budgets have been met and
which have not. It also alerts the project team
to issues which may cause problems in the
future.
Lecture 1-50
Inputs to Cost Control (contd)

Change Requests
These may occur in many forms-oral
or written, direct or indirect, externally
or internally initiated, and legally
mandated or optional. These may
require increasing
the budget or
may allow decreasing it.
Lecture 1-51

Control
Cost
Change Control System
It defines the procedures by which the cost

baseline may be changed. It includes the
paperwork, tracking systems, and approval
levels necessary for authorizing changes.
Performance Measurement
It helps to assess the magnitude of any
variations which do occur.
Lecture 1-52

Control (contd)
Additional
Planning
Perspective
changes
may
require new or revised
cost
estimates or analysis of alternate
approaches.
Computerized Tools
Lecture 1-53
Outputs from Cost Control

Revised
Cost Estimates
Budget Updates
Corrective Action
Estimate at Completion
It is a forecast of total project costs
based on project performance.
Lessons Learned
Lecture 1-54
Objects of Cost Control

1 To have a knowledge of the profit and loss of the
project throughout the duration of the project.
PROJECT PROFITS
1. Client payments.
2. Sale of surplus or scrap material and plant
3. Payments for plants or labor by others, where, this plant or labor
is , from time to time not required for the project.
PROJECT LOSSES
1) Labor and site office costs
2) Plant costs
3) Site overheads i.e. site facilities, access roads and office etc
4) Cost of tendering including bonds, insurance, etc.
5) Material costs.
6) Head office overheads proportioned over all current projects.
Lecture 1-55
Objects of Cost Control (contd)

2 To have a comparison between the actual project
performance and that conceived in the original
project plan.
Comparison is basically done according to the following
bases:
1)
2)
According to units of production

According to line items; e.g., labor, material, equipment, overheads, ---
3 Provides feedback data on actual project

performance to future project planning.
Lecture 1-56
The Project Cost System

Objectives of Establishing Project Cost
System.
1.
Keep the construction costs of the project within the

established budget.
2.
Develop labor and equipment productivity

information for estimating the cost of future work.
Lecture 1-57
Cost Codes
Each account of a contractor's accounting

system is assigned its own code designation
as a means of identification and
classification.
The most widely used cost codes are

CSI (Construction Specifications Institute)
and UCI (Uniform Construction Index).
Lecture 1-58
Cost Code and Cost Control
All items of expense are charged to the project

where they are incurred.
"General" or "miscellaneous" cost accounts should
not be used, is poor practice, and should be
avoided.
The cost code is to serve its basic purpose, it must
be understood and used consistently by all
company personnel.
Lecture 1-59
Cost Accounting Reports
Labor and equipment summary cost reports must be

prepared often enough so that excessive costs can be
detected while there is time to do something about them.
Cost report intervals are a function of the project size,

nature of the work, and the type of contract involved.
There must be a balance between the cost of generating

the reports and the value of the management information
received.
Lecture 1-60
Cost Accounting Reports

(contd)
Cost reports are frequently prepared daily on complex

projects involving multiple shifts.
Most contractors match their cost control system to their

payroll periods and to their time-monitoring system.
Lecture 1-61
Labor/Equipment Cost & Cost

Control
The job costs associated with materials,

subcontracts, and non-labor items of project
overhead are of a reasonably fixed nature.
Labor
and
considerable
equipment
uncertainty
costs
and
have
fluctuate
substantially during the construction period.

Lecture 1-62
Labor/Equipment Cost & Cost

Control (contd)
Contractor can control labor and equipment

to some extent, and require constant
management attention.
Detailed cost accounting methods must be

used with labor and equipment expenses if
effective management control over them is to
be obtained.
Lecture 1-63

Cost Engineering

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Cost Engineering

Загружено:

Авторское право:

Доступные форматы

Dr.

Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and

Dr. Farrukh Arif,

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

projects are broken down

Dr. Farrukh Arif, Assistant Professor, NED UET

Design Is a New Combination of

Dr. Farrukh Arif, Assistant Professor, NED UET

and Definition of Problem

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Description = Good Solution

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Defines Economic Want

Dr. Farrukh Arif, Assistant Professor, NED UET

Economic Evaluation Produces:

Dr. Farrukh Arif, Assistant Professor, NED UET

Results from Economic Evaluation

Requires Answers to Questions

Selects from Design Alternatives

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

Large Quantities / Little Variation

Smaller Quantities / Large Variation

Very Small Quantities / Specialized

Dr. Farrukh Arif, Assistant Professor, NED UET

By Point in the Development

Data (Accounting Records)

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and

Dr. Farrukh Arif,

Dr. Farrukh Arif, Assistant Professor, NED UET

What is Cost Engineering?

(AACE) defines cost engineering as

Dr. Farrukh Arif, Assistant Professor, NED UET

Total Cost Management

The effective application of professional and technical

It is a systematic approach to managing cost throughout

This is accomplished through the application of cost

Dr. Farrukh Arif, Assistant Professor, NED UET

Projects can cover anything from a 2-day

We will relate most of the cost-engineering

Dr. Farrukh Arif, Assistant Professor, NED UET

Project Life Cycle

Dr. Farrukh Arif, Assistant Professor, NED UET

Why are Projects Built?

Favourable analysis of the marketing situation

Dr. Farrukh Arif, Assistant Professor, NED UET

Why are Projects Built?

Questions needed to be answered

Dr. Farrukh Arif, Assistant Professor, NED UET

THE IMPORTANCE OF THE

Three important documents are critical to the

Represent a major commitment by upper

Dr. Farrukh Arif, Assistant Professor, NED UET