PROJECT AND

COST ENGINEERS
HANDBOOK
Fourth Edition
Copyright 2005 by Marcel Dekker
1. Applied Cost Engineering, Forrest D.Clark and
A.B.Lorenzoni
2. Basic Cost Engineering, Kenneth K.Humphreys and
Sidney Katell
3. Applied Cost and Schedule Control, James A.Bent
4. Cost Engineering Management Techniques, James
H.Black
5. Manufacturing Cost Engineering Handbook, edited by
Eric M.Malstrom
6. Project and Cost Engineers Handbook: Second
Edition, Revised and Expanded, edited by Kenneth
K.Humphreys
7. How to Keep Product Costs in Line, Nathan Gutman
8. Applied Cost Engineering: Second Edition, Revised
and Expanded, Forrest D.Clark and A.B.Lorenzoni
9. Managing the Engineering and Construction of Small
Projects: Practical Techniques for Planning,
Estimating, Project Control, and Computer
Applications, Richard E.Westney
10. Basic Cost Engineering: Second Edition, Revised and
Expanded, Kenneth K.Humphreys and Paul Wellman
11. Cost Engineering in Printed Circuit Board
Manufacturing, Robert P.Hedden
12. Construction Cost Engineering Handbook, Anghel
Patrascu
13. Computerized Project Control, Fulvio Drigani
14. Cost Analysis for Capital Investment Decisions, Hans
J.Lang
15. Computer-Organized Cost Engineering, Gideon Samid
16. Engineering Project Management, Frederick
L.Blanchard
COST ENGINEERING
A Series of Reference Books and Textbooks
Editor
KENNETH K.HUMPHREYS, Ph.D.
Consulting Engineer
Granite Falls, North Carolina
Copyright 2005 by Marcel Dekker
17. Computerized Management of Multiple Small Projects:
Planning, Task and Resource Scheduling, Estimating,
Design Optimization, and Project Control, Richard
E.Westney
18. Estimating and Costing for the Metal Manufacturing
Industries, Robert C.Creese, M.Adithan, and B.S.Pabla
19. Project and Cost Engineers Handbook: Third Edition,
Revised and Expanded, edited by Kenneth
K.Humphreys and Lloyd M.English
20. Hazardous Waste Cost Control, edited by Richard
A.Selg
21. Construction Materials Management, George Stukhart
22. Planning, Estimating, and Control of Chemical
Estimation Projects, Pablo F.Navarrete
23. Precision Manufacturing Costing, E.Ralph Sims, Jr.
24. Techniques for Capital Expenditure Analysis, Henry
C.Thorne and Julian A.Piekarski
25. Basic Cost Engineering: Third Edition, Revised and
Expanded, Kenneth K.Humphreys and Paul Wellman
26. Effective Project Management Through Applied Cost
and Schedule Control, edited by James A.Bent and
Kenneth K.Humphreys
27. Cost Management of Capital Projects, Kurt Heinze
28. Applied Cost Engineering: Third Edition, Forrest D.Clark
and A.B.Lorenzoni
29. Planning, Estimating, and Control of Chemical
Construction Projects: Second Edition, Revised and
Expanded, Pablo F.Navarrete and William C.Cole
30. Value Engineering: Analysis and Methodology, Del
L.Younker
31. Project and Cost Engineers Handbook: Fourth Edition,
edited by Kenneth K.Humphreys
Copyright 2005 by Marcel Dekker
edited by
KENNETH K.HUMPHREYS
Consulting Engineer
Granite Falls, North Carolina, U.S.A.
PROJECT AND
COST ENGINEERS
HANDBOOK
Fourth Edition
NEW YORK MARCEL DEKKER
Copyright 2005 by Marcel Dekker
Although great care has been taken to provide accurate and current information, neither
the author(s) nor the publisher, nor anyone else associated with this publication, shall be
liable for any loss, damage, or liability directly or indirectly caused or alleged to be caused
by this book. The material contained herein is not intended to provide specific advice or
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and are used only for identification and explanation without intent to infringe.
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ISBN: 0-8247-5746-7
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Copyright 2005 by Marcel Dekker. All Rights Reserved.
Neither this book nor any part may be reproduced or transmitted in any form or by any
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Current printing (last digit):
10 9 8 7 6 5 4 3 2 1
PRINTED IN THE UNITED STATES OF AMERICA
Dr. James M.Neil, PE, 19272003
Jim Neil served the cost engineering profession with distinction as an author,
educator, and professional engineer. A strong supporter of education, Jim
Neil worked tirelessly with the AACE International Education Board in
developing reference materials for the profession and in fostering the growth
of and support for scholarship programs. Upon Jim Neils unexpected passing
in 2003, Barry McMillan, Executive Director of AACE International said,
Jim quietly made an enormous impact on our Association, on the profession,
on the business community, and on those who knew him in other walks of
life.
This book is dedicated in memory of Dr. James M.Neil, PE. His
contributions to the cost engineering profession and to education will long be
remembered.
Copyright 2005 by Marcel Dekker
Preface
Twelve years have passed since the publication of the Third Edition of the
Project and Cost Engineers Handbook. In some ways nothing about the topic
has changed. In other ways, everything has changed. Nothing has changed in
the fundamental principles of cost engineering. They remain as they were
back then. However, with the explosive growth of e-mail and the Internet, the
gathering and sharing of data and information has indeed changed dramatically.
E-mail was a novelty when the Third Edition was published, and the fax was
the predominant method of sharing documents and information over great
distances. Now e-mail, scanners, and cell phones dominate communications
and the facsimile machine is destined to become a museum piece.
When the Third Edition was published, INTERNET was understood in
the cost engineering and project management professions to mean the
International Project Management Association. Now INTERNET is the
worldwide web and the International Project Management Association has,
of necessity, abandoned the Internet name and now is simply IPMA.
In this same period IPMA and the International Cost Engineering Council
(ICEC), both of which are confederations of national cost and project
management associations, have expanded dramatically to include well over
60 national cost and project associations around the world, more than double
the previous number of national associations within the IPMA and ICEC
organizations.
Projects and products have become more and more multinational in nature,
and cost engineers and project managers are increasingly concerned about
international cost considerations.
In this same period projects seemingly have become more risky and cost
and project engineers are increasingly concerned about risk analysis. Risks
have even been exacerbated by the proliferation of cost and schedule software
which is all too often misused by persons lacking the experience which is
necessary to discern when the output of the software, be it an estimate or a
schedule, is realistic. Work which was previously done by an experienced
cost or project engineer all too often is now handled by an inexperienced
v
Copyright 2005 by Marcel Dekker
person who relies on software without really understanding its limitations or
if the inherent assumptions made when the software was developed are
reasonable for the project at hand.
Further, business scandals and corporate mismanagement seem to have
proliferated with increased frequency, resulting in project failures, bankruptcies,
corporate collapse, and in some cases, criminal indictments. This has brought
increased concern about business and engineering ethics.
For these various reasons, except for necessary factual and reference
chapters of the Third Edition have been retained in this Edition. However, the
Fourth Edition expands on the Third Edition with the addition of discussions
of international project considerations, project risk analysis and contingency,
ethical considerations and, of course, the Internet.
As was the case with the previous three editions of the Project and Cost
Engineers Handbook, this work would not have been possible without the
many contributions of members of AACE International, the Association for
the Advancement of Cost Engineering. My thanks go to them and to AACE
International for once again agreeing to sponsor this book. Special thanks go
to the Houston Gulf Coast Section of AACE International and the late Aaron
Cohen, PE CCE and the late Thomas C.Ponder, PE CCE who in 1979 were
responsible for originating the first edition and to Dr. Lloyd M.English, PE
who collaborated with me on the third edition.
Kenneth K.Humphreys, PhD, PE CCE
vi Preface
Copyright 2005 by Marcel Dekker
updating and some expansion of Chapter 3, Cost Estimating, all of the
Acknowledgments
The editor wishes to acknowledge the many individuals who have contributed
to all four editions of the Project and Cost Engineers Handbook.
Special thanks are due to AACE International (the Association for the
Advancement of Cost Engineering) for once again sponsoring this book as
they did with the prior three edition. Thanks are also due to the International
Cost Engineering Council and its member associations for providing much of
the information which forms the basis for the new material in this edition.
Personal thanks go to Charles P.(Chick) Woodward for his insights on
international project considerations and to Michael Curran, President of
Decision Sciences Corporation, St. Louis, Missouri, from whom I gained a
deep appreciation for concepts of risk analysis and its value in project
evaluation.
vii
Copyright 2005 by Marcel Dekker
Contents
Preface v
Acknowledgments vii
Contributors xv

1. Cost Engineering Basics 1
1.1 Mathematics of Cost Comparisons 1
1.2 Depreciation 4
1.3 Accelerated Cost Recovery System: 19811986 9
1.4 Modified Accelerated Cost Recovery System (MACRS) 10
1.5 Cost Comparisons of Unequal Durations 11
1.5.1 Continuous Interest 16
1.6 Inflation 18
1.7 The Learning Curve 22
1.8 Profitability 26
1.9 Working Capital 29
1.10 Conceptual Costing 30
1.11 Forecasting 30
1.12 Value Engineering 32
1.13 Optimization 35
1.13.1 Linear Programming 35
1.13.2 Dynamic Programming 38
1.14 Nomenclature 40
Recommended Reading 41
2. Cost Accounting 43
2.1 Project Cost Accounting 43
2.2 Role of Cost Accounting 44
2.2.1 Accounting Terms 44
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Copyright 2005 by Marcel Dekker
2.3 Classification of Costs 47
2.3.1 Direct Costs 49
2.3.2 Indirect Costs 49
2.3.3 Overhead Costs 50
2.3.4 Standard Costs 51
2.3.5 Joint Costs 52
2.3.6 Job Order and Process Costing 54
References 55
Recommended Reading 55
3. Cost Estimating 57
3.1 Capital Cost Estimation 57
3.1.1 Purpose of Estimates 57
3.1.2 Fixed Capital and Working Capital 58
3.1.3 Current Trends in Capital-Cost Estimating 58
3.1.4 Types of Estimates 59
3.1.5 Functions of Capital-Cost Estimates 61
3.1.6 Cost of Making Estimates 61
3.1.7 Representation of Cost Data 62
3.1.8 Factored Estimating 63
3.1.9 Codes of Account 73
3.1.10 Startup Costs 74
3.1.11 Evaluation of the Estimate 76
3.2 Operating Cost Estimation 77
3.2.1 Definitions 77
3.2.2 Purposes of Operating Cost Estimates 77
3.2.3 Raw Materials and Utilities 78
3.2.4 Operating Labor 79
3.2.5 Maintenance 79
3.2.6 Indirect Payroll Cost 80
3.2.7 Operating Supplies 80
3.2.8 Laboratory and Other Service Costs 80
3.2.9 Royalties and Rentals 80
3.2.10 Indirect Costs 81
3.2.11 Distribution Costs 81
3.2.12 Avoidance of Nuisances 81
3.2.13 Contingencies 81
3.2.14 Shortcut Methods 82
3.2.15 Components of Total Product Cost 85
3.3 Summary 85
References 85
Recommended Reading 86
4. Economic Equivalence and Profitability 87
4.1 Introduction 87
4.2 Profitability Analysis 89
Contents x
Copyright 2005 by Marcel Dekker
4.2.1 Depreciation 90
4.2.2 Practical Examples of Economic Comparisons and
Profitability 92
4.2.3 Lease Versus Purchase 95
4.2.4 Economics for Capital Projects or Replacements 97
4.2.5 Scheduling a Loan Payment 101
References 115
Recommended Reading 116
5. Cost Control and Reporting 117
5.1 Introduction 117
5.2 Project Formats 118
5.2.1 Contracting Party Viewpoints 118
5.3 Establishing Baselines for Control 119
5.3.1 Cost Control Variables 120
5.4 Status Evaluation and Control 124
5.4.1 Cost/Schedule Integration 124
5.5 Reporting and Analysis 128
5.5.1 Frequency of Reports 129
5.5.2 Variance Analysis 129
5.5.3 Report Distribution 129
References 134
Recommended Reading 135
6. Project Management and Schedule Control 137
6.1 Project Management, Organization, and
Execution Conflict 137
6.2 Project Management and Control 141
6.3 PERT, CPM, Arrow and Precedence Scheduling 156
Recommended Reading 167
7. Cost Indexes, Escalation, and Location Factors 169
7.1 Cost Indexes 169
7.1.1 How to Use an Index 171
7.1.2 How an Index is Compiled 173
7.1.3 Analysis of some Building Cost Indexes 175
7.1.4 Limitations in Using Published Indexes 177
7.1.5 Procedure for Estimating Escalation 179
7.2 Location Factors 181
7.2.1 Background Sources 182
7.2.2 International Location Factors 184
7.2.3 Country Cost Indexes 197
7.2.4 Cost Data Sources 197
References 197
Recommended Reading and Other Information Sources 198
xi Contents
Copyright 2005 by Marcel Dekker
8. Operations Research Techniques 201
8.1 Linear Programming 201
8.1.1 Two-Dimensional Graphical Solution 205
8.1.2 Simplex Method 207
8.1.3 Conversion to Simplex Form 208
8.1.4 Interpretation of Simplex Solutions 211
8.2 Dynamic Programming 212
8.3 Simulation 213
8.3.1 Coin Problem 214
8.3.2 Random Variables 215
8.3.3 Queuing Problem 216
8.3.4 Discussion 218
Recommended Reading 220
9. Risk Analysis: How to Do it and How Not to Do it 221
9.1 Introduction 221
9.2 The Fourth Variable 222
9.3 The Monte Carlo Approach 223
9.4 Contingency 224
9.5 Avoiding Risk Analyst Induced Risk 225
9.6 Conducting the Risk Analysis 226
9.7 Available Risk Analysis Software 226
References 227
Recommended Reading 228
10. Cost Engineering in a Worldwide Economy 229
10.1 Introduction 229
10.2 Project Elements Checklist 230
10.2.1 Project Design 230
10.2.2 Bulk Materials 230
10.2.3 Engineered (Process) Equipment 231
10.2.4 Construction Labor 231
10.2.5 Construction Equipment 232
10.2.6 Construction Management Staffing 232
10.2.7 Schedule 232
10.2.8 Local Infrastructure Requirements 232
10.2.9 Material & Equipment Delivery (Shipping & Customs) 233
10.2.10 Progress Payments (Cash Flow) 234
10.2.11 Local Taxes 234
10.2.12 Insurance 235
10.2.13 Project Finance 235
10.2.14 Legal Recourse 235
10.2.15 Social System 235
10.3 How Do You Begin? 236
10.4 Conclusion 237
Recommended Reading 238
xii Contents
Copyright 2005 by Marcel Dekker
11. Computer Applications for Project Control 239
11.1 Why Consider Computerization? 239
11.2 Definition of Terms 240
11.3 Considerations in the Design of Project
Management Systems 244
11.4 Basic Steps in System Design and Implementation 245
11.5 A Review of Project Control Software 257
11.5.1 Planning and Scheduling Software 257
11.5.2 Cost Estimating Software 258
11.5.3 Economic Analysis Software 260
11.5.4 Management Reporting Software 260
11.5.5 Risk Analysis Software 260
11.6 Computer-Aided Design Applications for
Project Management 261
11.6.1 Basic CAD Components and Capabilities 261
11.6.2 CAD Applications to Cost Control 262
11.6.3 CAD Applications to Weight Control 262
11.6.4 CAD Applications to Document Control 262
11.6.5 CAD Applications to Maintenance 263
11.6.6 CAD Applications to Construction Planning 263
Recommended Reading 264
12. Cost Engineering Ethics 265
12.1 Black and White, or Gray? 265
12.2 The International Cost Engineering Council
Canons of Ethics 266
12.3 Computer-Aided Nightmares 267
12.4 A Computer-Assisted Catastrophe 269
12.5 International Project Ethics 272
References 274
Recommended Reading 274

Appendix A. AACE International Certification Programs 275
A.1 Introduction 275
A.2 Certified Cost Engineer/Certified
Cost Consultant Examination 275
Exam Basis 275
Exam Schedule 276
Exam Format 276
Preparation Guidance 278
The Professional Paper 278
Sample Exam Questions 280
Answers to Sample Exam Questions 283
A.3 Interim Cost Consultant Examination 283
Exam Basis, Schedule and Format 283
ICC Sample Exam Questions 283
A.4 Planning and Scheduling Professional
Certification Examination 284
Contents xiii
Copyright 2005 by Marcel Dekker
Appendix B. Standard Cost Engineering Terminology 285
Appendix C. Guide to Project and Cost Related Internet Sites 315
C.1 Introduction 315
C.2 Cost Engineering, Quantity Surveying, and
Project Management Associations and Institutes 315
C.3 Cost Engineering and Project Management Software 320
C.3.1 Cost Estimating Software 320
C.3.2 Project Management, Planning and
Scheduling Software 321
C.3.3 Risk Analysis and Range Estimating Software 322
C.4 Publishers of Cost Data and Information 322
C.5 Other Web Sites of Interest 324
xiv Contents
Copyright 2005 by Marcel Dekker
Contributors
Dorothy J.Burton
1
Management Systems Associates, Ltd., St. Louis, Missouri,
U.S.A.
R.L.Dodds
2
Project Execution Planners, Houston, Texas, U.S.A.
Lloyd M.English, PE
1
AACE International, Morgantown, West Virginia, U.S.A.
Jerry L.Hamlin, PE CCE
2
Grand Bassa Tankers, Inc., Tulsa, Oklahoma,
U.S.A.
James W.Higgenbotham
2
St. Regis Paper Company, Houston, Texas, U.S.A.
Michael E.Horwitz, PE CCE
1
Simons-Eastern Consultants, Inc., Atlanta,
Georgia, U.S.A.
Kenneth K.Humphreys, PhD PE CCE
3
Consulting Engineer, Granite Falls,
North Carolina, U.S.A.
Barry G.McMillan
1
AACEInternational, Morgantown, West Virginia, U.S.A.
John P.Nolan, Sr.
1
Sargent & Lundy Engineers, Chicago, Illinois, U.S.A.
John J.ODriscoll
2
Shell Oil Company, Houston, Texas, U.S.A.
F.Fred Rahbar
1
M.M.Al-Rumaih Compound, Jedddah, Saudi Arabia
E.E.Stackhouse
2
ICARUS Corporation, Houston, Texas, U.S.A.
1
Contributors to the third edition and affliations at that time. The work of these contributors has been
retained in the fourth edition.
2
Contributors to second edition and affiliations at that time. Portions of the work of these contributors
appear in the fourth edition.
3
Contributor to the second, third, and fourth editions. Portions of his prior work appear in the fourth
edition.
xv
Copyright 2005 by Marcel Dekker
Wilfred Stelly, CCE
2
C-E Lummus Co., Houston, Texas, U.S.A.
Kul B.Uppal, PE
1
Amoco Chemical Corporation, Houston, Texas, U.S.A.
A.J.Wallace
2
C-E Lummus Co., Houston, Texas, U.S.A.
Richard E.Westney, PE
1
Spectrum Consultants International, Inc., Houston,
Texas, U.S.A.
Charles P.Woodward, PE CCE Burns & Roe Services Inc., Virginia Beach,
Virginia, U.S.A.
xvi Contributors
Copyright 2005 by Marcel Dekker